Chapter 9
Corporate Strategy:
Mergers and Acquisitions, Strategic Alliances
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9.1 Mergers and Acquisitions
 Merger: combining two companies usually similar in size
• Friendly approach
 Ex: Ernst & Young
 Acquisition: purchase or takeover of a company
• Can be friendly
 Ex: Disney buys Pixar
• Hostile takeover
 Ex: Vodafone buys Mannesmann
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Merging with Competitors
 Horizontal integration: process of merging and
acquiring competitors
• HP buys Compaq in 2002.
• Pfizer buys Wyeth in 2009.
• Live Nation buys Ticketmaster in 2010.
 Benefits:
•
•
•
•
Reduce competitive intensity
Lower costs
Increased differentiation
Access to new markets and distribution channels
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Exhibit 9.1 Sources of Value Creation
and Costs in Horizontal Integration
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Strategy Highlight 9.1
Food Fight: Kraft’s Hostile Takeover of Cadbury
 Kraft acquired Cadbury in UK.
• Hostile takeover, $20 billion deal
• Cadbury has strong position in emerging economies.
 Perfected distribution system in countries like India
• Kraft faces strong rivalries worldwide, including China.
 2012 − Kraft restructured
 With Hershey’s attention on China (2013 entry), Kraft
has an opportunity for gaining U.S. market share.
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M&A and Competitive Advantage
 Many M&As actually destroy shareholder value!
• When there is value, it often goes to the acquiree.
• Acquirers tend to pay a premium.
 Why still desire M&As?
• Principal–agent problems
• Overcome competitive disadvantage
• Superior acquisition and integration capability
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9.2 Strategic Alliances
STRATEGIC ALLIANCE
• A voluntary arrangement between firms that involves the sharing of
knowledge, resources, and capabilities with the intent of developing
processes, products, or services
STRATEGIC CRITERIA
• An alliance qualifies as strategic only if it has the potential to affect a
firm’s competitive advantage.
RATIONAL VIEW OF COMPETITIVE ADVANTAGE
• Framework where critical resources and capabilities are embedded in
strategic alliances that span firm boundaries
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Why Do Firms Enter Strategic
Alliances?
 Strengthen competitive position
• Apple vs. Amazon
 Enter new markets
• Local partner for global growth
• Microsoft partners with Yahoo on search
 Hedge against uncertainty
• Real options approach
 Roche invests in Genentech 1990 & buys it in 2009
 Access critical complementary assets
• Pixar partners with Disney
 Learn new capabilities
• GM & Toyota (NUMMI) – formed in 1984
 Who won the learning race? Probably Toyota….
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Strategy Highlight 9.2
Strategic Alliances to Challenge Amazon
 Amazon’s Kindle
• Content providers do not want fixed price for e-books. ($9.99)
• Below cost is thesame strategy Amazon started for printed books.
 Apple’s iPad
• Let publishers set the prices directly (Agency model)
• Worked with publishers to increase bargaining power
 Challenge Amazon’s early lead in the delivery of e-content
• Amazon share dropped from 90 to 60% in e-books.
 2013 – a federal judge ruled that Apple colluded with
publishers to drive up prices of e-books
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Governing Strategic Alliances
 Governing mechanisms:
• Non-equity alliances
 Based on contracts
• Equity alliances
 One firm takes partial ownership in the other
• Joint ventures
 Standalone organization owned by 2 or more firms
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Exhibit 9.2 Key Characteristics of
Different Alliance Types
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NON-EQUITY ALLIANCES
 Most common forms of alliance
• Supply agreements
• Distribution agreements
• Licensing agreements
 Vertical strategic alliances
 Firms share explicit knowledge
• Knowledge that can be codified
 Patents
 User manuals and fact sheets,
 Scientific publications
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EQUITY ALLIANCES
 At least one partner takes partial ownership position
• Stronger commitment toward the relationship
 Allow the sharing of tacit knowledge
• Tacit knowledge concerns the “know-how”
 Partial ownership, thus equity alliances signal
stronger commitments
 Moreover, equity alliances allow for the sharing of
tacit knowledge that can not be codified.
• Toyota has an equity alliance with Tesla.
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EQUITY ALLIANCES: CORPORATE VENTURE CAPITAL
 Corporate venture capital (CVC) – Equity investments
by established firms in entrepreneurial ventures
 Equity alliances produce stronger ties and greater trust
between partners than non-equity alliances do.
 Examples:
• Dow Venture
• Siemens
• Kaiser Permanente
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JOINT VENTURES
 Joint ventures (JVs) are the strong ties, trust, and
commitment that can result.
 Created and owned by two or more companies
• Hulu owned by NBC, ABC, and Fox
 Long-term commitment
• Exchange both tacit and explicit knowledge
• Frequent interaction of personnel
 Used to enter foreign markets
 Least common of the 3 types of alliances
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Alliance Management Capability
 A firm’s ability to effectively manage three alliancerelated tasks concurrently
 30 to 70% of all alliances yield disappointing results
1. Partner selection and alliance formation
2. Alliance design and governance
3. Post-formation alliance management
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Exhibit 9.3 Alliance Management
Capability
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PARTNER SELECTION AND ALLIANCE FORMATION
 The expected alliance benefits must exceed its costs.
 One or more of the five alliance formation reasons
should be present:
1.
2.
3.
4.
5.
Strengthen competitive position
Enter new markets
Hedge against uncertainty
Access critical complementary resources
Learn new capabilities
 Partner compatibility and commitment are necessary
conditions a for successful alliance.
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Exhibit 9.4 How to Make Alliances Work
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POST-FORMATION ALLIANCE MANAGEMENT
 To effectively manage the ongoing relationship
• Tips:
 Make relationship-specific investments
 Establish knowledge-sharing routines
 Build interfirm trust
• Ex: HP’s dense network of alliances vs. DEC
 Dedicated alliance function
• Coordinate alliance-related tasks – at corporate level
• Knowledge base about how to manage alliance
 Ex: Eli Lilly is a clear leader in alliance management.
 Best to develop a relational capability
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9.3 Implications for the Strategist
 A strategist has three options to drive firm growth:
• Organic growth through internal development
• External growth through alliances
• External growth through acquisition
 The build-borrow-or-buy framework:
• Aids strategists in deciding whether to pursue internal
development (build)
• Enter a contract arrangement or strategic alliance (borrow)
• Acquire new resources, capabilities, and competencies
(buy)
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Exhibit 9.5 How to Implement a
Corporate Strategy: The Build-Borrow-or-Buy
Framework
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Take-Away Concepts
LO 9-1
Differentiate
between
mergers and
acquisitions,
and explain
why firms
would use
either as a
vehicle for
corporate
strategy.
Merger
• A merger describes the joining of two independent
companies to form a combined entity.
Acquisition
• An acquisition describes the purchase or takeover of one
company by another. Can be friendly or hostile.
M&A Umbrella Term
• Although there is a distinction between mergers and
acquisitions, many observers simply use the umbrella
term “Mergers & Acquisitions,” or M&A.
Superior Relational Capability
• Firms use M&A activity for competitive advantage
when they possess a superior relational capability, which
is built on a superior alliance management capability.
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Take-Away Concepts
LO 9-2
Define
horizontal
integration and
evaluate the
advantages and
disadvantages
of this
corporate-level
strategy.
Horizontal Integration
• Horizontal integration is the process
of merging with competitors, leading
to industry consolidation.
Reasons
• As a corporate strategy, firms use
horizontal integration to:
• Reduce competitive intensity
• Lower costs
• Increase differentiation
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Take-Away Concepts
LO 9-3
Explain why
firms engage in
acquisitions.
 Firms engage in acquisitions to (1)
access new markets and distributions
channels, (2) gain access to a new
capability or competency, and (3)
preempt rivals.
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Take-Away Concepts
LO 9-4
Evaluate
whether
mergers and
acquisitions
lead to
competitive
advantage.
 Most mergers and acquisitions destroy shareholder
value because anticipated synergies never
materialize.
 If there is any value creation in M&A, it generally
accrues to the shareholders of the firm that is taken
over (the acquiree), because acquirers often pay a
premium when buying the target company.
 Mergers and acquisitions are a popular vehicle for
corporate-level strategy implementation for three
reasons: (1) because of principal–agent problems,
(2) the desire to overcome competitive
disadvantage, and (3) the quest for superior
acquisition and integration capability.
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Take-Away Concepts
LO 9-5
Define
strategic
alliances, and
explain why
they are
important
corporate
strategy
vehicles and
why firms
enter into
them.
Strategic Alliances
• Strategic alliances have the goal of sharing knowledge,
resources, and capabilities in order to develop processes,
products, or services.
Competitive Advantage
• An alliance qualifies as strategic if it has the potential to
affect a firm’s competitive advantage by increasing value
and/or lowering costs.
Reasons for Alliances
• The most common reasons why firms enter alliances are
to: (1) strengthen competitive position, (2) enter new
markets, (3) hedge against uncertainty, (4) access critical
complementary resources, and (5) learn new capabilities.
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Take-Away Concepts
LO 9-6
Describe
three alliance
governance
mechanisms
and evaluate
their pros
and cons.
Alliances can be governed by the
following mechanisms: contractual
agreements for non-equity alliances,
equity alliances, and joint ventures.
Exhibit 9.2 presents the pros and cons of
each alliance governance mechanism.
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Take-Away Concepts
LO 9-7
Describe the
three phases of
alliance
management and
explain how an
alliance
management
capability can
lead to a
competitive
advantage.
 An alliance management capability can be
a source of competitive advantage.
 An alliance management capability consists
of a firm’s ability to effectively manage
three alliance-related tasks concurrently:
(1) partner selection and alliance formation,
(2) alliance design and governance, and (3)
post-formation alliance management.
 Firms build a superior alliance
management capability through “learningby-doing” and by establishing a dedicated
alliance function.
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Take-Away Concepts
LO 9-8
Apply the
buildborrow-orbuy
framework to
guide
corporate
strategy.
The build-borrow-or-buy framework
provides a conceptual model that aids
strategists in deciding whether to pursue
internal development (build), enter a
contract arrangement or strategic alliance
(borrow), or acquire new resources,
capabilities, and competencies (buy).
Firms that are able to learn how to select
the right pathways to obtain new
resources are more likely to gain and
sustain a competitive advantage.
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